Auto Net v Tyler
[2021] NZHC 542
•17 March 2021
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2019-419-000327
[2021] NZHC 542
BETWEEN AUTO NET
Plaintiff
AND
MICHAEL STEVEN TYLER
Defendant
CIV-2020-419-000142 BETWEEN
ROBERT DEVON STONE
PlaintiffAND
MICHAEL STEVEN TYLER
First Defendant
AND
AUTO NET
Second Defendant
Hearing: 11 March 2021 (by AVL) Appearances:
C Hanafin for Plaintiff
U B Keller for Defendants
Judgment:
17 March 2021
JUDGMENT OF ASSOCIATE JUDGE PAULSEN
This judgment was delivered by me on 17 March 2021 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
AUTO NET v TYLER [2021] NZHC 542 [17 March 2021]
[1] The plaintiff (Auto Net) seeks leave to appeal to the Court of Appeal pursuant to s 56(3) and (4) of the Senior Courts Act 2016 from a decision of Associate Judge Smith of 21 September 2020 refusing it summary judgment against the defendant (Mr Tyler).1 The application is opposed.
Background
[2] Auto Net is incorporated in the Cayman Islands and is one of a number of companies around the world owned by interests associated with Robert Stone (Mr Stone) and Hohua Hemi (Mr Hemi). At relevant times the director of Auto Net was David Roberts (Mr Roberts). Auto Net’s directors are now Michael Pearson and Christopher Rowland who were appointed as independent directors of the ultimate beneficial owners of Auto Net. The ultimate beneficial owners of Auto Net are Mr Stone’s wife, Luciane De Souza Fernandes, and interests associated with Mr Hemi.
[3] Mr Stone and Mr Hemi have conducted international business enterprises together for a number of years. Mr Stone and Mr Hemi have now fallen out, and there is litigation in a number of jurisdictions, including New Zealand, between them and/or companies or entities with which they are associated.
[4] One such enterprise is a Japanese-registered company, IBC Japan Ltd (IBC). It sells Japanese cars to New Zealand buyers. Until recently, IBC sold cars to a New Zealand member of the Hemi/Stone commercial group, Autoterminal New Zealand Ltd (ATNZ). Mr Hemi now controls IBC, and ATNZ no longer purchases cars from IBC. Litigation is pending between IBC and ATNZ.
[5] In 2004, Mr Tyler was appointed sole director of ATNZ and in 2008, at the request of Mr Stone and Mr Hemi, he agreed to leave his role in the Philippines to return to New Zealand in order to manage ATNZ on a full-time basis. He says Mr Stone and Mr Hemi agreed to give him full decision-making control over ATNZ’s business and a full indemnity backed by Mr Stone, Mr Hemi and entities with which they were associated.
1 Auto Net v Tyler [2020] NZHC 2459.
[6] Later, in 2009, Auto Net’s 100 per cent shareholding in ATNZ was transferred from Auto Net into Mr Tyler’s name. This was to avoid the need for ATNZ, as a foreign-owned company, to file annual accounts with the Companies Office. That would have disclosed the level of ATNZ’s indebtedness to IBC which Mr Stone and Mr Hemi considered might have had critical implications for IBC and cause the bank to either step-in or withdraw its funding to the company.
[7] Auto Net claims Mr Tyler is a bare trustee for it of the shares in ATNZ and seeks to compel Mr Tyler to transfer those shares to it. It contends Mr Tyler’s only obligation under the bare trust was to act on its directions, as both settlor and beneficiary of the trust, and that Mr Tyler has failed to transfer the shares to it when so directed. In the alternative, Auto Net says it is entitled to wind up the trust under the rule in Saunders v Vautier.2 Auto Net asks for orders directing Mr Tyler to enter Auto Net’s name in ATNZ’s share register as the owner of the shares, and/or an order under s 91 of the Companies Act 1993 rectifying the share register to record that Auto Net is the legal owner of the shares. Auto Net applied for summary judgment on its claim.
[8] Mr Tyler accepts he holds the ATNZ shares on trust for Auto Net, but denies that he has any obligation to transfer the shares to it. He argues the claim is not suitable for summary judgment as:
(a)there are factual disputes regarding the terms of the trust, including disputes about who the proper beneficiaries of the trust are and whether there are restrictions on Mr Tyler transferring the shares. Principally, this is because Mr Stone contends Mr Tyler was not to transfer the shares without the consent of both Mr Stone and Mr Hemi, which has not been forthcoming;
(b)he has an arguable defence based on rights of indemnity arising at law and by agreement, which take priority over Auto Net’s beneficial interest in the shares; and
2 Saunders v Vautier (1841) 41 ER 482 (Ch).
(c)this proceeding is part of a proxy battle between Mr Hemi and Mr Stone, forming part of a wider commercial war spanning multiple jurisdictions and other parties and the Court should refuse summary judgment in the exercise of its residual discretion.
The judgment
[9]Associate Judge Smith declined summary judgment because:
(a)it was reasonably arguable that the basis upon which Mr Tyler held the ATNZ shares included a requirement that he was not to transfer them to anyone without the consent of both Mr Hemi and Mr Stone;
(b)that it was not clear the rule in Saunders v Vautier applied in circumstances where the beneficiary of a trust has accepted a restriction on its entitlement to call for delivery of trust property and there was not enough evidence of the “surrounding circumstances” when the trust was established to justify the entry of summary judgment; and
(c)it was reasonably arguable that the total amount secured by Mr Tyler’s equitable lien over the ATNZ shares (limited to future legal fees billed in respect of this proceeding) equalled or exceeded the value of those shares.
The consolidated proceeding
[10] After Auto Net’s summary judgment application was heard, but before judgment was issued, Mr Stone commenced a proceeding against Mr Tyler and Auto Net.3 Mr Stone alleges Mr Tyler was not to transfer the ATNZ shares without the consent of both him and Mr Hemi. He pleads that Auto Net has made demand upon Mr Tyler to transfer the shares to Auto Net. As against Mr Tyler, he seeks to prevent Mr Tyler transferring or otherwise dealing with the ATNZ shares without the consent of both him and Mr Hemi. As against Auto Net, Mr Stone alleges it is estopped from
3 Stone v Tyler HC Hamilton CIV 2020-419-142.
asserting or taking any actions inconsistent with Mr Tyler holding the shares otherwise than on the basis that they cannot be transferred or otherwise dealt with without the consent of him and Mr Hemi.
[11] On 13 November 2020, counsel for Auto Net, Mr Tyler and Mr Stone filed a joint memorandum seeking consolidation of Auto Net’s proceeding and Mr Stone’s proceeding along with directions concerning Auto Net’s application for leave to appeal Associate Judge Smith’s decision. On 16 November 2020, Associate Judge Andrew made a consent order consolidating the proceedings on the basis:4
[3] I am satisfied, for the reasons submitted by all counsel, that both proceedings concern the same issues of fact and law and that consolidating the proceedings will avoid the risk of conflicting decisions and achieve efficiency of costs and judicial resources.
[12] On 18 November 2020, counsel for all parties filed a further joint memorandum seeking directions by consent for the filing of submissions and hearing of Auto Net’s application for leave to appeal. Associate Judge Andrew made those directions on 19 November 2020. Notice of the hearing of Auto Net’s application for leave to appeal was given to all parties.
The proposed grounds of appeal
[13] Auto Net wishes to advance three grounds of appeal. These are that Associate Judge Smith erred in finding:
(a)it is reasonably arguable on the evidence that Mr Tyler holds the ATNZ shares subject to a requirement that he was not to transfer the shares to anyone (including Auto Net) without the consent of Mr Stone and Mr Hemi;5
(b)that the rule in Saunders v Vautier may not apply in circumstances where:
4 Auto Net v Tyler HC Hamilton CIV-2019-419-327, 16 November 2020.
5 Auto Net v Tyler, above n 1, at [116].
(i)the settlor of a trust is also a beneficiary; and/or
(ii)the beneficiary has accepted a restriction on its entitlement to call for delivery of the trust property;6 and
(c)it is reasonably arguable the total amount secured by Mr Tyler’s equitable lien over the shares may equal or exceed the value of the shares.7
The leave requirement
[14] The requirement for Auto Net to seek leave to appeal to the Court of Appeal arises under s 56(3) and (4) of the Senior Courts Act which provide:
(3)No appeal, except an appeal under subsection (4), lies from any order or decision of the High Court made on an interlocutory application in respect of any civil proceeding unless leave to appeal to the Court of Appeal is given by the High Court on application made within 20 working days after the date of that order or decision or within any further time that the High Court may allow.
(4)Any party to any proceedings may appeal without leave to the Court of Appeal against any order or decision in the High Court
---
(a)striking out or dismissing the whole or part of a proceeding, claim, or defence; or
(b)granting summary judgment.
[15] Section 56(3) is a “filtering mechanism” to prevent unnecessary delay caused by unmeritorious or insignificant appeals.8 In Ngai Te Hapu Inc v Bay of Plenty Regional Council the Court of Appeal referred to the following relevant considerations in Finewood Upholstery Ltd v Vaughan,9 as follows: 10
(a)A high threshold exists for the granting of leave. An allegation of error of law or fact is generally insufficient. An applicant should raise an arguable error.
6 At [128].
7 At [139].
8 Ngai Te Hapu Inc v Bay of Plenty Regional Council [2018] NZCA 291 at [12].
9 Finewood Upholstery Ltd v Vaughan [2017] NZHC 1679 at [8]-[9] referring to A v Minister of Internal Affairs [2017] NZHC 887.
10 Ngai Te Hapu Inc v Bay of Plenty Regional Council, above n 8, at [12].
(b)Leave should only be granted where the circumstances warrant incurring further delay.
(c)The alleged error should be of general or public importance that requires determination, or otherwise be of sufficient importance to the applicant to outweigh the lack of any general or precedential importance.
[16] In Moir v IHC New Zealand Inc the Court of Appeal held leave should only be granted if the appeal raises issues “capable of bona fide and serious argument” that are of “interest, public or private” and are “of sufficient importance to outweigh the cost and delay of the appeal”.11 The appeal should have a reasonable prospect of success for leave to be granted.12
[17]In Li v Chief Executive, Ministry of Business, Innovation and Employment,
Palmer J said:13
[22] More pithily, perhaps, an application to appeal an interlocutory decision under s 56(3) is likely to be granted where: (a) there is good reason to consider it before, or separately to, the substantive appeal; and (b) it is sufficiently meritorious in substance and relates to a sufficiently important issue as to outweigh the cost and delay of appeal.
[18] Both counsel referred me to Yu v Bradley as providing helpful guidance in a case involving an unsuccessful summary judgment application.14 There, Moore J applied a two-stage approach to his consideration of the application for leave to appeal as set out by Palmer J in Li v Chief Executive, Ministry of Business, Innovation and Employment as follows:15
[21] Pulling all these strands together, I consider the text, purpose, context and case law of s 56 suggests an application to appeal an interlocutory decision under s 56(3) is likely to be granted if:
(a) the appeal is not likely to be overtaken by the substantive hearing or cannot otherwise be considered as effectively in the context of an appeal of the substantive decision; or
(b) the appellant is likely to be prejudiced by a postponement to the substantive appeal; or
11 Moir v IHC New Zealand Inc [2018] NZCA 130 at [6].
12 At [6].
13 Li v Chief Executive, Ministry of Business, Innovation and Employment [2018] NZHC 1171, [2018] NZAR 1134.
14 Yu v Bradley [2018] NZHC 2312.
15 Li v Chief Executive, Ministry of Business, Innovation and Employment, above n 13.
(c) the appeal may be dispositive of the case in law or as a practical matter;
and
(d) the arguments in the appeal are capable of bona fide and serious argument; and
(e) the issue on appeal concerns a decision of sufficient significance to the parties or a question of law or general principle of sufficient importance as to outweigh the cost and delay of the appeal.
[19] Moore J considered in the ordinary course of applications for leave to appeal a summary judgment, the first limb of the test will always be satisfied because an appeal against a decision declining to grant summary judgment will be overtaken by the substantive decision. His Honour said:16
The summary judgment procedure serves an independent function and purpose in the trial process … it brings the benefit of time and cost savings if a proceeding is resolved before a substantive hearing. In that regard, the appellant is likely to be prejudiced by a postponement to the substantive appeal, by which time any benefits of the summary judgment procedure will be squandered.
[20]Additionally, his Honour said:17
[A]n appeal concerning an application for summary judgment, if successful, will be dispositive. This conclusion is reinforced by the fact that appeals against a decision of the High Court granting summary judgment may be brought without leave.
[21] Moore J declined to grant leave to appeal because he considered that no aspect of the Judge’s conclusion that the defendants had an arguable defence to the claim was capable of bona fide and serious argument on appeal, and it was appropriate they be resolved at trial with the benefit of full argument and comprehensive evidence.
[22] Finally, I should note that Ms Keller highlighted the following matters which she submits, and I accept, are of relevance in this case:
16 Yu v Bradley, above n 14, at [15].
17 At [16]. (footnote omitted).
(a)under s 56(3) of the Senior Courts Act the Court has a discretion to decline to hear interlocutory appeals;
(b)if leave to appeal is refused in respect of a decision of the High Court on an interlocutory application, nothing in s 56 prevents any point raised in the application for leave to appeal from being raised in an appeal from the substantive decision of the High Court;18
(c)ultimately the Court hearing an application for leave to appeal from an interlocutory decision must “stand back and assess, in a pragmatic and realistic way, whether the interests of justice are served by granting leave to appeal”.19
Discussion
[23]It is convenient to approach the application using the following headings:
(a)Reasons to consider the appeal in advance of the substantive proceeding.
(b)The merits of the appeal.
(c)The importance of the appeal.
Reasons to consider the appeal in advance of the substantive proceeding
[24] Auto Net argues if the appeal is successful it will be dispositive of its claim against Mr Tyler. It contends also, while an appeal from the summary judgment decision may (if unsuccessful) postpone progress of the substantive proceeding, such delay will not prejudice Mr Tyler.
[25] Mr Tyler argues a successful appeal by Auto Net will not be dispositive in law or as a practical matter. Should Auto Net be successful, Mr Stone is likely to seek
18 Senior Courts Act 2016, s 56(6).
19 Finewood Upholstery Ltd v Vaughan, above n 9, at [14].
injunctive relief to prevent a transfer of the shares. In contrast, a full hearing in which Mr Stone can participate will achieve a definitive resolution of all issues between the parties.
[26] Mr Tyler’s primary concern is not so much delay as the additional cost and inconvenience which, he considers, will necessarily result if leave to appeal is granted. He argues the dispute requires a full hearing and as all points Auto Net now raises can be relied upon at the trial (and on any appeal that may follow), Auto Net will not be prejudiced if declined leave to appeal.
[27] I do not accept if Auto Net is successful on appeal that will not be dispositive of the proceeding. A decision in Auto Net’s favour will certainly be dispositive of the dispute as between Auto Net and Mr Tyler and, I consider, it will also be dispositive of Mr Stone’s claims against Auto Net and Mr Tyler. Mr Stone is a party to this proceeding and bound by issues estoppel created by any judgment on the appeal. This will include any ruling on the fundamental matter of the terms upon which Mr Tyler held the shares on trust for Auto Net.20 Even if I am wrong about that, it is not necessarily the case that Mr Stone would in the face of an adverse judgment of the Court of Appeal, and where the Court has had the benefit of his detailed evidence, seek injunctive relief against Auto Net, nor that he would obtain injunctive relief if he did.
Merits of the proposed appeal
First ground
[28] Auto Net submits factual findings of the Associate Judge leading to his conclusion it was reasonably arguable Mr Tyler holds the ATNZ shares subject to a requirement that he was not to transfer them to anyone (including Auto Net) without the consent of Mr Stone and Mr Hemi, were not supported by sufficient evidence. It relies particularly on the following.
20 K R Handley Spencer Bower and Handley: Res Judicata (5th ed, LexisNexis, London, 2019) at 133-135.
[29] First, Mr Tyler does not say in his evidence there was an agreement the shares would not be transferred without the consent of Mr Stone and Mr Hemi. Related to this, it is argued the Associate Judge failed to have proper regard to a document prepared by Mr Tyler in March 2009 recording the basis upon which the shares were transferred to him making no mention of any limit upon Auto Net’s right to call upon him to transfer the shares back to it.
[30] Second, it is submitted the Associate Judge erroneously conflates events that occurred in 2008, when Mr Tyler agreed to relocate to New Zealand, and 2009, when the shares were transferred to him. That led to the Associate Judge’s finding (at [118]) that when he moved from the Philippines Mr Tyler expected to have full control of ATNZ including rights as its sole legal shareholder. Further, (at [129]) that it would be dangerous to conclude it is beyond reasonable argument that when Mr Tyler agreed to come to New Zealand it was on the basis he would have full control of ATNZ “including in his capacity as the sole legal shareholder of ATNZ”.21 Auto Net contends, the transfer of the shares had nothing to do with giving Mr Tyler control of ATNZ.
[31] Third, that it was not open to the Associate Judge to find that Mr Roberts was aware of the arrangements allegedly entered into by Mr Stone, Mr Hemi and Mr Tyler and impliedly accepted those arrangements on behalf of Auto Net. The only reference to Mr Roberts being advised of the alleged arrangements is in the evidence of Mr Stone, but all he says is that Mr Roberts was “notified” and “informed” of the arrangements without providing detail of when and the circumstances under which this was said to have occurred.
[32] Ms Keller submits Associate Judge Smith appropriately found that Auto Net had failed to discharge its onus to show Mr Tyler did not have an arguable defence to the claim. She contends given the complexity, the lengthy history and the significant conflicts of evidence, the claim was always unsuitable for summary judgment.
[33] My assessment is there is some merit in Auto Net’s submissions. The Court of Appeal will be in as good a position as the Associate Judge to assess the evidence and
21 Auto Net v Tyler, above n 1, at [123].
come to its own conclusions on these matters. I consider this proposed ground of appeal is at least arguable.
Second ground
[34] Auto Net argued before the Associate Judge, even if there was a condition on Auto Net’s entitlement to demand delivery of the shares, that entitlement was trumped by the rule in Saunders v Vautier. Auto Net argues there is no authority to support the propositions upon which the Associate Judge’s reasoning appears to be based that the rule in Saunders v Vautier does not apply in circumstances where (a) the settlor of a trust is also a beneficiary and/or (b) the beneficiary has accepted a restriction on his or her entitlement to call for delivery of the trust property. 22
[35] Mr Tyler supports the Associate Judge’s finding and relies upon the Canadian authorities Buschau v Rogers Communications Inc,23 and N-Krypt International Corp v LeVasseur.24 Particular reliance is placed on N-Krypt International Corp. There, N- Krypt purchased shares in a company controlled by LeVasseur (LV). A term of the purchase agreement required N-Krypt to put its shares into a voting trust with LV as a trustee. When the relationship between the parties broke down N-Krypt sought the return of its shares which was opposed by LV on the basis it was contrary to the parties’ agreement. N-Kyrpt argued the rule in Saunders v Vautier applied as the voting trust agreement between the parties stated unequivocally that it was the sole beneficial owner of the shares and was entitled to their return when the term of the trust expired. The Court of Appeal of British Columbia held the rule in Saunders v Vautier was inapplicable in circumstances where N-Kyrpt had contractually bound itself to give the trustee of its shares the right to vote the shares for 10 years as a condition of obtaining them.25 N-Krypt was not, therefore, solely entitled to the beneficial enjoyment of the shares during the term of the trust – the voting rights which formed part of the bundle of property rights attaching to the shares was to be enjoyed by another and used in its own interests.26
22 At [128].
23 Buschau v Rogers Communications Inc [2006] SCC 28.
24 N-Krypt International Corp v LeVasseur [2018] BCCA 20, [2018] BCJ 58 at [39].
25 At [39].
26 At [39].
[36] The decision in N-Krypt International Corp appears unsurprising, as the rule in Saunders v Vautier does not apply where the beneficiary does not have an absolute interest in the trust property or its interest is vested but defeasible. N-Krypt was not solely entitled to the beneficial enjoyment of the shares during the term of the trust and could not call for their return. Here, the circumstances are very different as no such benefit was conferred on Mr Tyler. Furthermore, an arrangement that Mr Hemi and/or Mr Stone may in any circumstances and potentially forever prevent a transfer of the ATNZ shares to their beneficial owner is plainly objectionable as a matter of principle.
[37] The Associate Judge did not cite any authority to support his view the rule in Saunders v Vautier does not apply in this case. I consider it arguable the rule does apply. I also consider it arguable the Associate Judge’s refusal to apply the rule cannot be justified on the basis of an absence of evidence of “surrounding circumstances” when the only relevant circumstance advanced concerned the existence of the alleged limitation on Auto Net’s right to deal with the shares.
Third ground
[38] The Associate Judge found that because neither party produced the most recent financial statements for ATNZ, and the value of the shares might be affected by the outcome of litigation with IBC,27 it would be unsafe to conclude the amount of Mr Tyler’s lien would not exceed the value of ATNZ’s shares.28
[39] Auto Net has offered to allow Mr Tyler to retain 24 per cent of the ATNZ shares as security for any liability incurred and covered by his lien. It argues it was up to Mr Tyler to provide the financial information to allow the Court to form a view as to the value of the shares.
[40] Mr Tyler argues Auto Net had been provided with up-to-date financial information in relation to ATNZ and it was Auto Net that was required to establish that
27 Auto Net v Tyler, above n 1, at [145].
28 At [146].
it was not reasonably arguable that a portion of shares (proposed at 24 per cent) would be insufficient.
[41] I consider the arguments are something of a red herring. At issue are Mr Tyler’s future costs in this proceeding which, in the context of the broader dispute/litigation and the financial circumstances of the entities involved, will be insignificant. If Auto Net can establish on appeal that the Associate Judge was wrong on either of its first two grounds of appeal it would be entitled to an order for a transfer of shares subject to satisfaction of Mr Tyler’s lien. I would expect any judgment of the Court directing a transfer of the shares would be subject to such a condition.
Importance of the Appeal
[42] Auto Net argues its second ground of appeal is a matter of general or public importance warranting consideration by the Court of Appeal. It also argues the appeal is of sufficient importance to it to outweigh any lack of general precedential value. It says the importance of seeking to resolve this proceeding on an appeal must be seen in the context of the myriad of related proceedings ongoing in New Zealand and overseas. Specifically, Auto Net requires legal title to the shares so it has the ability to appoint directors to the board of ATNZ and have input into the manner in which the company conducts its litigation. It says the importance of having this legal power vested in the entity that is the 100 per cent beneficial owner of ATNZ cannot be overstated. Furthermore, the sums at stake are very significant. The financial accounts of ATNZ show assets of $48,316,312 and liabilities of $47,632,819. It is facing a claim from IBC and Mr Tyler says IBC claims approximately $80,000,000. These are very large sums and the beneficial owner of the shares in ATNZ should not be excluded from decision-making affecting the company’s future. The expeditious resolution of this proceeding is therefore a matter of significant importance to Auto Net.
[43] Mr Tyler submits the grounds of appeal are not of sufficient general public importance and any precedential value they may have will be greater following a full hearing. He submits also, there is no basis for concern as to how he is managing ATNZ.
[44] In my view, the second ground of appeal is not a matter of great public importance. It appears to me that issue will be decided on established principles. What is very significant is that Auto Net, which is undeniably the beneficial owner of all of the shares in ATNZ, presently has no effective input (and certainly not control) over the management of the company, its very substantial assets or the conduct of litigation in which it is involved concerning many millions of dollars. Mr Tyler has given evidence of his concerns as to the intentions of the independent directors of Auto Net, but it appears to me that proffering such evidence is incongruent in circumstances where his counsel argues his only personal interest in retaining the shares is to protect himself for payment of sums to which he is entitled as trustee. I consider the appeal is a matter of great importance to Auto Net.
Conclusions
[45] My conclusions are the grounds of appeal advanced are capable of bona fide and serious argument. I consider the grounds are sufficiently meritorious to outweigh the costs and inconvenience of an appeal. I also consider the appeal is of such significance to Auto Net to outweigh any lack of general or precedential value in the grounds of appeal. Standing back and looking at the matter as a whole, the ultimate question is whether the interests of justice are served by granting leave and I consider that they are.
Result
[46] I grant Auto Net leave to appeal the decision of Associate Judge Smith of 21 September 2020.
[47] I reserve costs. Counsel are to confer and attempt to reach agreement on costs. If agreement cannot be reached, counsel may file memoranda in relation to costs within 21 days. Memoranda are to be no more than five pages.
O G Paulsen Associate Judge
Solicitors:
Wynn Williams, Auckland
Braun Bond & Lomas Limited, Hamilton
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